Monday, February 19, 2007

Hip-Hop Outlaw (Industry Version)By SAMANTHA M. SHAPIRO

February 18, 2007 New York Times Magazine

Late in the afternoon of Jan. 16, a SWAT team from the Fulton County Sheriff’s Office, backed up by officers from the Clayton County Sheriff’s Office and the local police department, along with a few drug-sniffing dogs, burst into a unmarked recording studio on a short, quiet street in an industrial neighborhood near the Georgia Dome in Atlanta. The officers entered with their guns drawn; the local police chief said later that they were “prepared for the worst.” They had come to serve a warrant for the arrest of the studio’s owners on the grounds that they had violated the state’s Racketeer Influenced and Corrupt Organizations law, or RICO, a charge often used to lock up people who make a business of selling drugs or breaking people’s arms to extort money. The officers confiscated recording equipment, cars, computers and bank statements along with more than 25,000 music CDs. Two of the three owners of the studio, Tyree Simmons, who is 28, and Donald Cannon, who is 27, were arrested and held overnight in the Fulton County jail. Eight employees, mostly interns from local colleges, were briefly detained as well.

Later that night, a reporter for the local Fox TV station, Stacey Elgin, delivered a report on the raid from the darkened street in front of the studio. She announced that the owners of the studio, known professionally as DJ Drama and DJ Don Cannon, were arrested for making “illegal CDs.” The report cut to an interview with Matthew Kilgo, an official with the Recording Industry Association of America, who was involved in the raid. The R.I.A.A., a trade and lobbying group that represents the major American record labels, works closely with the Department of Justice and local police departments to crack down on illegal downloading and music piracy, which most record-company executives see as a dire threat to their business.

Kilgo works in the R.I.A.A.’s Atlanta office, and in the weeks before the raid, the local police chief said, R.I.A.A. investigators helped the police collect evidence and conduct surveillance at the studio. Kilgo consulted with the R.I.A.A.’s national headquarters in advance of the raid, and after the raid, a team of men wearing R.I.A.A. jackets was responsible for boxing the CDs and carting them to a warehouse for examination.

If anyone involved with the raid knew that the men they had arrested were two of the most famous D.J.’s in the country, they didn’t let on while the cameras were rolling. For local law enforcement, the raid on Drama and Cannon’s studio was no different from a raid they executed in October on an Atlanta factory where a team of illegal immigrants was found making thousands of copies of popular DVDs and CDs to sell on the street. Along with the bootlegged CDs, the police found weapons and a stash of drugs in the factory. (The Fox report on the DJ Drama raid included a shot of a grave-looking police officer saying, “In this case we didn’t find drugs or weapons, but it’s not uncommon for us to find other contraband.”)

But Drama and Cannon’s studio was not a bootlegging plant; it was a place where successful new hip-hop CDs were regularly produced and distributed. Drama and Cannon are part of a well-regarded D.J. collective called the Aphilliates. Although their business almost certainly violated federal copyright law, as well as a Georgia state law that requires CDs to be labeled with the name and address of the producers, they were not simply stealing from the major labels; they were part of an alternative distribution system that the mainstream record industry uses to promote and market hip-hop artists. Drama and Cannon have in recent years been paid by the same companies that paid Kilgo to help arrest them.

The CDs made in the Aphilliates’ studio are called mixtapes — album-length compilations of 20 or so songs, often connected by a theme; they are produced and mixed by a D.J. and usually “hosted” by a rapper, well known or up-and-coming, who peppers the disc with short boasts, shout-outs or promotions for an upcoming album. Some mixtapes are part of an ongoing series — in the last few years, the Aphilliates have produced 16 numbered installments of “Gangsta Grillz,” an award-winning series that focuses on Southern hip-hop; others represent a one-time deal, a quick way for a rapper to respond to an insult or to remind fans he exists between album releases. The CDs are packaged in thin plastic jewel cases with low-quality covers and are sold at flea markets and independent record stores and through online clearinghouses like mixtapekingz.com. A mixtape can consist of remixes of hit songs — for instance, the Aphilliates offered a CD of classic Michael Jackson songs doctored by a Detroit D.J. Or it can feature a rapper “freestyling,” or improvising raps, over the beat from another artist’s song; so, on one mixtape, LL Cool J’s “Love You Better” became 50 Cent’s “After My Cheddar.” In most cases, the D.J. modifies the original song without acquiring the rights to it, and if he wants to throw in a sample of Ray Charles singing or a line from a Bugs Bunny cartoon, he doesn’t worry about copyright. The language on mixtapes is raw and uncensored; rappers sometimes devote a whole CD to insulting another rapper by name. Mixtapes also feature unreleased songs, often “leaked” to the D.J. by a record label that wants to test an artist’s popularity or build hype for a coming album release. Record labels regularly hire mixtape D.J.’s to produce CDs featuring a specific artist. In many cases, these arrangements are conducted with a wink and a nod rather than with a contract; the label doesn’t officially grant the D.J. the right to distribute the artist’s songs or formally allow the artist to record work outside of his contract.

In December, not long before the bust, I spent a week with DJ Drama and the Aphilliates in Atlanta. The D.J.’s are true celebrities in the city’s vibrant hip-hop community. They were seated at the V.I.P. tables at nightclubs and parties and surrounded by fans at strip clubs, which in Atlanta are considered crucial venues for new hip-hop; tracks are often given their first spins while strippers frantically shake their behinds.

Although the music that the Aphilliates promote glorifies violence and drug dealing — one of their trademark Gangsta Grillz sound effects is a few shots fired by a gun with a silencer, followed by the thud of a body dropping — they did not live a gangster lifestyle. (Drama often rose at 8 a.m. to take his oldest daughter to kindergarten at a private school.) Instead, they seemed to be aspiring young music executives with a long-term business plan who had figured out a faster and more lucrative way to make it big than an internship at a record label.

The success of “Gangsta Grillz” had secured for the Aphilliates their own radio shows and record contracts, as well as endorsement deals with Pepsi and clothing companies. When I visited, the Aphilliates were working on an “official” Gangsta Grillz release, to be distributed by Grand Hustle, part of Atlantic Records; Drama said it would use only licensed songs and cleared samples. In September, the Aphilliates signed a partnership deal with Asylum Records, part of Warner Music Group, to distribute albums that Drama and Cannon would produce.

DJ Drama knew that aspects of his business were in what he described to me as “a legal gray area,” and he was secretive about even the most basic facts of how the Aphilliates ran their business. He allowed that he had “got rich” because of his reputation as a mixtape D.J., though he would not even admit to me that he actually sold mixtapes. The line between self-promotion and secrecy was sometimes an awkward one for him to walk, especially as his underground CDs moved further into the mainstream. Several small distributors had begun selling Drama’s CDs, repackaged with scannable barcodes, to major retailers like Best Buy.

One of the CDs confiscated by R.I.A.A. investigators during the Atlanta raid was “Dedication 2,” a mixtape that DJ Drama made with Lil Wayne, a New Orleans rapper; it appeared on the Billboard hip-hop and R&B charts and was widely reviewed in the mainstream press. (Kelefa Sanneh of The New York Times chose “Dedication 2” as one of the 10 best recordings of 2006.) As the R.I.A.A. agents boxed up Drama’s stash of “Dedication 2,” the CD continued to sell well at major retailers like Best Buy and FYE (a national chain of record stores) and also at the iTunes Store online.

The local Fox report of the bust was posted on the Internet and widely viewed. The spectacle of men who were known to every hip-hop fan as players in the mainstream music industry being arrested with the aid of the enforcement arm of that same industry was so bizarre and unexpected that a handful of conspiracy theories quickly arose to explain what had happened. Some fans speculated on message boards that the D.J.’s must have been running other illegal businesses on the side. There were others who thought that the bust was payback from a small distributor who had recently sued DJ Drama for violating a contract. But most fans simply thought the men were victims of a music industry that didn’t understand hip-hop. The day after Drama’s arrest, fans circulated on the Internet a stylized image of Drama’s face over a caption that said “Free Drama and Cannon.” Mixunit.com, the biggest Web distributor of mixtapes, removed its entire stock from the site and posted pictures of Drama and Cannon on its main page with the message, “Free the D.J.’s.” A member of the Diplomats, a Harlem hip-hop group, told MTV News that Jan. 16 was “D-day in hip-hop.” Some fans said that in protest they’d never buy another label release; a New York City radio D.J. called record labels the ultimate “snitches.”

Lil Wayne, who made “Dedication 2” with Drama, said in an interview that Drama would have to “play the game fair,” adding that he thought it was unfortunate that sometimes mixtapes outsell an artist’s official label releases, cutting into the artist’s royalties. Soon after, Rapmullet.com, one of the most prominent mixtape Web sites, posted an image of Wayne on its home page over the words: “Is Wayne a traitor? Did he side with the suits? We didn’t abandon Drama — will you? Who’s next to jump ship?”

Drama is the public face of the Aphilliates, but he, Cannon and their third partner, DJ Sense (a k a Brandon Douglas, 26) function as a team; all three are the hosts of a weekly radio show broadcast on WHTA, an Atlanta hip-hop and R&B station, and another Gangsta Grillz show on Sirius satellite radio, and they jointly own the Aphilliates Music Group. The men have been friends since they met at college a decade ago, and they have an easy rhythm with one another, like teammates who play pickup basketball every week and can pass or negotiate a pick without making eye contact. All three wear the collective’s signature neck chain with a diamond-encrusted pendant in the shape of the letter A.

Drama, whose mother is a white education professor and whose father is a black civil rights activist, has expressive brown eyes and a closely trimmed beard. He usually wears a baseball cap backward or propped loosely atop his light brown hair, cocked to the side. Although his workday rarely starts before noon, he comes across as a savvy businessman. Most of the time he doesn’t say much, but it’s clear he is always paying close attention to what is going on around him. When he is in the studio, about to lay down a Gangsta Grillz “drop” (a phrase that is repeated throughout a mixtape), or when he has to tell a bouncer that no, he won’t stand behind that velvet rope, he rocks back and forth, building his energy, then barks out a torrent of speech, after which he seems to retreat back into himself again. He has a quiet, focused energy that can seem gruff; around Sense and Cannon, though, he gets goofy.

Cannon is a huge guy — 6-foot-6 and 250 pounds — with a lumbering gait and a sweet, unguarded smile. He sometimes spends 24 hours at a stretch in the studio, hunched over a mixing board and a computer running Pro Tools, taking breaks to play video games. He loves to shop, and he especially likes to visit high-end Atlanta malls to buy Prada cologne and examine the jewelry. His enormous sneaker collection takes up the bulk of his apartment’s walk-in closet, as well as the trunk of his Chevy Tahoe S.U.V. and most of a storage space he rents by the month.

Sense is known as the visionary with the business ideas, the one who operates mostly behind the scenes. He is short and just a little bit nerdy. Once when we were in the studio at WHTA, a D.J. named Mami Chula wandered in while a song was playing. She gave Sense a look, shook her head and mused aloud, “I just never saw someone with such a small head.” Sense didn’t say anything, just gave her an indignant look. It seemed as if he was accustomed to being teased.

The day after the raid, when Drama and Cannon were each released from jail on $100,000 bonds, they drove straight to the WHTA studios, went on the air and promoted their coming label releases. There’s a video on YouTube that shows the scene: Drama swaggers into the studio in a white T-shirt and a gray zip-up track-suit jacket, his diamond “A” chain swinging across his chest.

The D.J.’s on air were known as the Durrty Boyz, and one of them announced that they had an “exclusive interview to find out what the hell is going on with Gangsta Grillz.” He asked the accused felons to get close to the microphone.

Cannon murmured: “It’s Don Cannon. Holla at me.”

DJ Sense, who also goes by the name Trendsetter, said: “Yeah, yeah, you know what it is. The boy T-t-t-t-t-t-trendsetta! Holla at your boy!”

Drama, who sometimes calls himself “Mr. Thanksgiving” because, he says, he “feeds the whole industry,” said: “Thanksgiving is every year, man. It doesn’t go nowhere. Do you understand what that means? It’s a holiday, it’s every year. . . . It’s not going nowhere. DJ Drama! I am in full effect.”

After the Durrty Boyz spun a Ying Yang Twins song, Drama took calls at a rapid clip, and he responded to nearly every question or message of support with a reminder of the Aphilliates’ coming Gangsta Grillz release on Atlantic.

In 1996, Sense and Drama, then both freshmen majoring in mass communications, met in Brawley Hall, their dorm at Clark Atlanta University. C.A.U. is part of the country’s largest consortium of historically black colleges, directly abutting Morehouse and Spelman. Drama and Sense were both aspiring D.J.’s, and they were both from Philadelphia. After they met, they competed in a local D.J. battle and became friends. The following year they met Cannon, also a D.J. from Philadelphia (“Aphilliates” combines the Phil of Philadelphia with an A for Atlanta), and the three became inseparable. Each D.J. found his own niche: Sense interned at WHTA, Cannon spun records at college parties and Drama started selling his own mixtapes. Every night in his apartment, Drama made 10 copies of his latest cassette, and the next day he brought them to campus. Between classes, he would set up a cheap yellow boom box on a major promenade at C.A.U. known as the Strip and offer tapes for sale. He also sold tapes at Georgia State, where he would tell customers that the identity of DJ Drama was a mystery. “I’d tell them I never met Drama, I don’t know the guy, I just work for him,” he told me.

In his junior year, in 1998, Drama put together a compilation of Southern hip-hop, which was beginning to emerge nationally as a distinct sound and style. Often called dirty South, it was more dance-oriented and melodic and raunchier than hip-hop from either coast. That mixtape, “Jim Crow Laws,” sold well, and Drama decided to start a Southern series, which he named Gangsta Grillz. Amateur mistakes were made early on — “we actually spelled ‘Grillz’ with an S,” Drama recalled — but the series quickly took off. Through Sense, Drama met a young local rapper named Lil Jon, who had helped invent a frenetic new style of hip-hop known as crunk. Drama asked Lil Jon to be the host of a mixtape, and Jon did a manic series of drops throughout Gangsta Grillz No. 4. It was the first CD that Drama was able to get into stores.

Around the time Drama was hitting his stride, a young entrepreneur named Jason Geter was working as a manager for T.I., then a little-known artist from Atlanta’s Bankhead housing projects signed to an imprint of Arista. Geter wasn’t happy with the label’s marketing of T.I.’s first album, so he undertook his own promotions, independently shooting a video and printing up T-shirts. Geter said that he started seeing Drama’s mixtapes everywhere — in barbershops and record stores. (“Drama was the most consistent guy doing mixtapes in Atlanta,” he told me. “Some of the other people didn’t even have covers for the CDs, but Drama stood out.”) One night Geter called Drama and asked if he could bring T.I. by Drama’s home studio to do some drops and freestyles on a mixtape.

Drama was ecstatic. “At that point, no one was really checking for me,” he told me. “I hadn’t had a call in three months.” After the impromptu recording session, Geter started giving Drama unreleased T.I. songs and eventually asked him to produce and release a whole CD of T.I.’s work. When T.I.’s mixtape “Down With the King” sold well, other managers started taking their artists to Drama’s studio. The first mixtape Drama was paid by a label to produce was “Tha Streetz Iz Watchin,” which Def Jam’s CTE label hired him to make with Young Jeezy in 2004, in order to build up hype for a coming CD. When Jeezy’s official release, “Let’s Get It: Thug Motivation 101,” came out in 2005, bearing a bonus track from the Drama mixtape, it sold two million copies.

At least once a week last fall, Jason Brown, the 30-year-old promotions director for the Aphilliates, could be found making a circuit of Atlanta with boxes of Drama’s new releases stacked in the back of his Chevy Tahoe. The trip often took as long as nine hours. The Thursday I rode with Brown, he was carrying copies of two mixtapes Drama had recently recorded in the studio with Lil Keke and Lil Boosie, who are popular in their home regions — Louisiana and South Texas, respectively — but have not yet broken out nationally. Brown drove down the parkways and roads of Atlanta’s low-income black suburbs, past a landscape of Waffle Houses, custom rim shops and halal meat stores, stopping in with his wares at flea markets and little mom-and-pop record shops.

At around 3 p.m., we pulled into the parking lot of Backstage Records, a small, tidy shop across the street from the Greenbriar Mall, a locale frequently mentioned in hip-hop lyrics. (Ludacris: “Any charges set against me, chunk it up and stand tall/Next year I’m lookin’ into buyin’ Greenbriar Mall.”) Brown tucked a stack of CDs under each arm and headed into the store. He greeted the owner, a short broad man in his late 20s named Vic XL.

“How many you want?” Brown asked XL, holding out the Keke and Boosie CDs.

“Whoa!” XL said, excited. “Boosie is overdue for a mixtape.” XL told me that Boosie’s major-label release, “Bad Azz,” on Asylum Records, was not selling well, but, he explained, “he’s a hood artist,” so that wasn’t a big surprise.

XL inspected both discs and placed his order: “I’m gonna take five.” As Brown started to count CDs off his pile, XL looked again at the liner notes and reconsidered: “No, 10 each.”

A small record store like Backstage rarely orders more than 10 copies of any CD, and Drama’s distribution system meets XL’s needs better than the mainstream distribution system does. If XL wants just 10 copies of the new Lil Scrappy CD, he can’t buy them directly from the label’s distributors as chains like Best Buy do. Instead, he has to go through a middleman called a one-stop, which charges XL $10.75 for a CD that retails at Best Buy for $9.99.

The economics of mixtapes appeal to XL, and so do their politics; as he sees it, mixtapes undermine the power of major record labels and radio stations. “Most artists can’t afford to get their music on the radio, but an artist has the right to let his fan base hear what he’s done,” XL said. “Who is the label to dictate how to feed the fan base?”

Mixtapes have long played an important role in hip-hop. In the late 1970s, before rap music was ever recorded onto vinyl or played on a radio station, people found out about hip-hop acts through live recordings of D.J. sets from block parties or clubs. Those cassette recordings were duplicated by hand and sold on the street or in record stores, and given free to gypsy-cab drivers in the Bronx as promotional tools. Throughout the ’80s and ’90s, mixtapes remained an important subculture. In the last five years, though, they have risen to a more prominent place in the industry and made the most successful D.J.’s rich.

Mixtapes fill a void left by the consolidation of record labels and radio stations. In the mid-1990s, sales of independent hip-hop albums exceeded those from major releases. But those smaller independent labels were bought out by major labels, and in the late ’90s, the last major independent distributor collapsed. This left few routes for unknown hip-hop artists to enter the market; it also made the stakes higher for major labels, which wanted a better return on their investment. As Jeff Chang, author of “Can’t Stop Won’t Stop,” a history of hip-hop, told me recently, “The whole industry shifted to massive economies of scale, and mixtapes are a natural outgrowth and response to that.”

Mixtape D.J.’s came to be seen as the first tier of promotions for hip-hop artists, a stepping stone to radio play. Labels began aiding and abetting mixtape D.J.’s, sending them separate digital tracks of vocals and beats from songs so they could be easily remixed. They also started sending copies of an artist’s mixtape out to journalists and reviewers along with the official label release. DJ Chuck T, a mixtape D.J. in South Carolina, told me that when label employees send him tracks to include on his mixtapes, they request a copy of the mixtape so that they can show their bosses the track is “getting spin from the street.” He also said record-label promoters want sales figures for his mixtapes so they can chart sales patterns, which they use in marketing their own releases.

Mixtape D.J.’s have effectively absorbed many of the functions of an A&R department, the branch of a record label that traditionally discovers and develops new talent. Ron Stewart, a promotions coordinator at Jive Records, a subsidiary of Sony BMG Music, told me he prefers to test new artists out on mixtapes. “Budget permitting,” he said, “we’d do a few mixtapes with a few D.J.’s, because they have different audiences in different regions.” Labels prefer to use established mixtape D.J.’s like Drama, rather than produce promotional CDs themselves, Stewart said, because “the best D.J.’s have a better brand than the average label does.”

Although the deals are informal and often secret, labels typically pay a prominent D.J. like Drama $10,000 to $15,000 to produce a mixtape for an artist. The label’s representatives, Stewart explained, adopt what amounts to a don’t ask, don’t tell policy about the D.J.’s plans to sell the work; what the D.J. does with his copy of the master, Stewart said, “is his own business.” For successful D.J.’s, mixtape sales can bring considerable revenue. Mixtapes sell for anywhere from $5 to $10 on the street or on a Web site like Mixunit, and overhead is low, since the CDs cost only about 50 cents to manufacture and D.J.’s rarely pay royalties or licensing fees.

Although many hip-hop artists view mixtapes as an essential way to build their careers, some are critical of aspects of the system. One editor of a hip-hop magazine, who would comment only anonymously, told me: “In the aftermath of the raid, talking to artists, the stuff they say when Drama’s not around — there is a little bit of animosity, because he is clearly making money off these artists. They all saw his car being towed off on TV. What was it? A Maserati?”

Killer Mike, an Atlanta rapper who is signed to Sony and who has been featured on a number of DJ Drama’s mixtapes, told me he is not really a “supporter” of mixtapes. “That doesn’t mean I don’t play mixtapes in my car and listen to other peoples’ mixtapes, but as an artist, I feel the amount of rhymes you have to write to put out a mixtape is the same amount you have to for an album,” he said. “I’d rather put out albums over my own beats than use other people’s beats and have a problem later.”

Pimp C, a Texas rapper who is half of the popular underground hip-hop duo UGK, has repeatedly refused to participate in a UGK mixtape despite requests by his record label and, he said, from countless mixtape D.J.’s. Pimp C told me that because there is no paper trail, mixtape D.J.’s are able to invent sales figures, and they routinely claim that, after their overhead, they just break even. But based on his experience producing two of his own mixtapes, Pimp C suspects D.J.’s make plenty; they just don’t want to give artist a cut. “Every time I was approached by a mixtape D.J., they tried to sell me the dream there was no money in it, and it was something artists need to do to help their album sales,” he said. “But I know how much bread can be made. . . . If you’re making money, chop it up with me.”

Before DJ Drama went to jail, no mixtape D.J. had been the target of a major raid; busts had been directed at small retailers, like Mondo Kim’s in New York’s East Village. Jonathan Lamy, a spokesperson for the R.I.A.A., said the raid on Drama’s studio represented no official change in policy and had been undertaken only at the behest of Atlanta law enforcement. But for many in the industry, the focus on a single prominent figure seemed like no accident. “Arresting them criminally under RICO was firing a warning shot at anyone who has mixtapes,” said Walter McDonough, a copyright lawyer who has negotiated with the R.I.A.A. on behalf of Jay-Z.

Others pointed to the selective nature of the crackdown as evidence that the raid was a deliberate effort — major retailers like Best Buy were not raided, even though they carry many of the same CDs Drama was arrested for selling. The R.I.A.A. “would have to know nothing about the industry they are monitoring not to realize this stuff is all over Best Buy and FYE,” says Eric Steuer, the creative director of Creative Commons, a nonprofit that works to develop more flexible copyright arrangements for artists and producers. “Maybe they leave them alone because the major chains have promotion deals with record labels.”

Ted Cohen, a former executive at EMI Records who now runs a music-consulting business, told me that the raid was typical of the music industry’s “schizophrenic” approach to promotions; a label’s marketing department wants to get its artists’ songs in front of as many people as possible, even if it means allowing or ignoring free downloads or unlicensed videos on YouTube. But the business department wants to collect royalties. “It is a case of the right hand not knowing what the left hand is doing,” Cohen said.

Drama’s arrest shook up mixtape D.J.’s and promoters across the country. But even in the days immediately following the raid, D.J.’s continued to release tapes — some with hastily added tracks on which rappers cursed the R.I.A.A. — and major labels continued to e-mail them new tracks. Some in the industry speculated that things would have to change, that mixtapes would either move further underground or become legitimate licensed products. But no one I spoke with thought the arrest would permanently damage Drama’s career. In fact, Julia Beverly, the editor of Ozone, a Southern hip-hop magazine, suggested that it was more likely to improve his image and album sales. “Really, this takes him to a gangsta level,” she said. “It gives him a little something extra. It’s messed up, but if someone goes to jail or dies, it elevates his status and just makes him more of a star than he was before. That’s the way the entertainment industry works in general. So, having cops at your door with M-16’s at your head, and MTV News reporting on the raid, calling you the biggest D.J. in the world? You can’t pay for that type of look.”

Saturday, February 10, 2007

With the stunning global success of Apple’s iPod music player and iTunes online music store, some have called for Apple to “open” the digital rights management (DRM) system that Apple uses to protect its music against theft, so that music purchased from iTunes can be played on digital devices purchased from other companies, and protected music purchased from other online music stores can play on iPods. Let’s examine the current situation and how we got here, then look at three possible alternatives for the future.

To begin, it is useful to remember that all iPods play music that is free of any DRM and encoded in “open” licensable formats such as MP3 and AAC. iPod users can and do acquire their music from many sources, including CDs they own. Music on CDs can be easily imported into the freely-downloadable iTunes jukebox software which runs on both Macs and Windows PCs, and is automatically encoded into the open AAC or MP3 formats without any DRM. This music can be played on iPods or any other music players that play these open formats.

The rub comes from the music Apple sells on its online iTunes Store. Since Apple does not own or control any music itself, it must license the rights to distribute music from others, primarily the “big four” music companies: Universal, Sony BMG, Warner and EMI. These four companies control the distribution of over 70% of the world’s music. When Apple approached these companies to license their music to distribute legally over the Internet, they were extremely cautious and required Apple to protect their music from being illegally copied. The solution was to create a DRM system, which envelopes each song purchased from the iTunes store in special and secret software so that it cannot be played on unauthorized devices.

Apple was able to negotiate landmark usage rights at the time, which include allowing users to play their DRM protected music on up to 5 computers and on an unlimited number of iPods. Obtaining such rights from the music companies was unprecedented at the time, and even today is unmatched by most other digital music services. However, a key provision of our agreements with the music companies is that if our DRM system is compromised and their music becomes playable on unauthorized devices, we have only a small number of weeks to fix the problem or they can withdraw their entire music catalog from our iTunes store.

To prevent illegal copies, DRM systems must allow only authorized devices to play the protected music. If a copy of a DRM protected song is posted on the Internet, it should not be able to play on a downloader’s computer or portable music device. To achieve this, a DRM system employs secrets. There is no theory of protecting content other than keeping secrets. In other words, even if one uses the most sophisticated cryptographic locks to protect the actual music, one must still “hide” the keys which unlock the music on the user’s computer or portable music player. No one has ever implemented a DRM system that does not depend on such secrets for its operation.

The problem, of course, is that there are many smart people in the world, some with a lot of time on their hands, who love to discover such secrets and publish a way for everyone to get free (and stolen) music. They are often successful in doing just that, so any company trying to protect content using a DRM must frequently update it with new and harder to discover secrets. It is a cat-and-mouse game. Apple’s DRM system is called FairPlay. While we have had a few breaches in FairPlay, we have been able to successfully repair them through updating the iTunes store software, the iTunes jukebox software and software in the iPods themselves. So far we have met our commitments to the music companies to protect their music, and we have given users the most liberal usage rights available in the industry for legally downloaded music.

With this background, let’s now explore three different alternatives for the future.

The first alternative is to continue on the current course, with each manufacturer competing freely with their own “top to bottom” proprietary systems for selling, playing and protecting music. It is a very competitive market, with major global companies making large investments to develop new music players and online music stores. Apple, Microsoft and Sony all compete with proprietary systems. Music purchased from Microsoft’s Zune store will only play on Zune players; music purchased from Sony’s Connect store will only play on Sony’s players; and music purchased from Apple’s iTunes store will only play on iPods. This is the current state of affairs in the industry, and customers are being well served with a continuing stream of innovative products and a wide variety of choices.

Some have argued that once a consumer purchases a body of music from one of the proprietary music stores, they are forever locked into only using music players from that one company. Or, if they buy a specific player, they are locked into buying music only from that company’s music store. Is this true? Let’s look at the data for iPods and the iTunes store – they are the industry’s most popular products and we have accurate data for them. Through the end of 2006, customers purchased a total of 90 million iPods and 2 billion songs from the iTunes store. On average, that’s 22 songs purchased from the iTunes store for each iPod ever sold.

Today’s most popular iPod holds 1000 songs, and research tells us that the average iPod is nearly full. This means that only 22 out of 1000 songs, or under 3% of the music on the average iPod, is purchased from the iTunes store and protected with a DRM. The remaining 97% of the music is unprotected and playable on any player that can play the open formats. It’s hard to believe that just 3% of the music on the average iPod is enough to lock users into buying only iPods in the future. And since 97% of the music on the average iPod was not purchased from the iTunes store, iPod users are clearly not locked into the iTunes store to acquire their music.

The second alternative is for Apple to license its FairPlay DRM technology to current and future competitors with the goal of achieving interoperability between different company’s players and music stores. On the surface, this seems like a good idea since it might offer customers increased choice now and in the future. And Apple might benefit by charging a small licensing fee for its FairPlay DRM. However, when we look a bit deeper, problems begin to emerge. The most serious problem is that licensing a DRM involves disclosing some of its secrets to many people in many companies, and history tells us that inevitably these secrets will leak. The Internet has made such leaks far more damaging, since a single leak can be spread worldwide in less than a minute. Such leaks can rapidly result in software programs available as free downloads on the Internet which will disable the DRM protection so that formerly protected songs can be played on unauthorized players.

An equally serious problem is how to quickly repair the damage caused by such a leak. A successful repair will likely involve enhancing the music store software, the music jukebox software, and the software in the players with new secrets, then transferring this updated software into the tens (or hundreds) of millions of Macs, Windows PCs and players already in use. This must all be done quickly and in a very coordinated way. Such an undertaking is very difficult when just one company controls all of the pieces. It is near impossible if multiple companies control separate pieces of the puzzle, and all of them must quickly act in concert to repair the damage from a leak.

Apple has concluded that if it licenses FairPlay to others, it can no longer guarantee to protect the music it licenses from the big four music companies. Perhaps this same conclusion contributed to Microsoft’s recent decision to switch their emphasis from an “open” model of licensing their DRM to others to a “closed” model of offering a proprietary music store, proprietary jukebox software and proprietary players.

The third alternative is to abolish DRMs entirely. Imagine a world where every online store sells DRM-free music encoded in open licensable formats. In such a world, any player can play music purchased from any store, and any store can sell music which is playable on all players. This is clearly the best alternative for consumers, and Apple would embrace it in a heartbeat. If the big four music companies would license Apple their music without the requirement that it be protected with a DRM, we would switch to selling only DRM-free music on our iTunes store. Every iPod ever made will play this DRM-free music.

Why would the big four music companies agree to let Apple and others distribute their music without using DRM systems to protect it? The simplest answer is because DRMs haven’t worked, and may never work, to halt music piracy. Though the big four music companies require that all their music sold online be protected with DRMs, these same music companies continue to sell billions of CDs a year which contain completely unprotected music. That’s right! No DRM system was ever developed for the CD, so all the music distributed on CDs can be easily uploaded to the Internet, then (illegally) downloaded and played on any computer or player.

In 2006, under 2 billion DRM-protected songs were sold worldwide by online stores, while over 20 billion songs were sold completely DRM-free and unprotected on CDs by the music companies themselves. The music companies sell the vast majority of their music DRM-free, and show no signs of changing this behavior, since the overwhelming majority of their revenues depend on selling CDs which must play in CD players that support no DRM system.

So if the music companies are selling over 90 percent of their music DRM-free, what benefits do they get from selling the remaining small percentage of their music encumbered with a DRM system? There appear to be none. If anything, the technical expertise and overhead required to create, operate and update a DRM system has limited the number of participants selling DRM protected music. If such requirements were removed, the music industry might experience an influx of new companies willing to invest in innovative new stores and players. This can only be seen as a positive by the music companies.

Much of the concern over DRM systems has arisen in European countries. Perhaps those unhappy with the current situation should redirect their energies towards persuading the music companies to sell their music DRM-free. For Europeans, two and a half of the big four music companies are located right in their backyard. The largest, Universal, is 100% owned by Vivendi, a French company. EMI is a British company, and Sony BMG is 50% owned by Bertelsmann, a German company. Convincing them to license their music to Apple and others DRM-free will create a truly interoperable music marketplace. Apple will embrace this wholeheartedly.

Reaction from Bob Lefsetz in his email newsletter:

"jawbone"

verb ( trans. )

attempt to persuade or pressure by the force of one's position of authority : the Federal Reserve Board Vice Chairman jawboned the dollar higher by calling its recent steep decline a purely speculative phenomenon | an analyst jawboning about the industry.

(Dictionary built into Mac OS X Tiger.)

Steve Jobs is under fire. From those pesky European countries, not ruled in a laissez faire beholden to business President like George Bush. They want him to open up the Apple iTunes Store.

Unlike the men running the record labels, Steve decided to go on the offensive.

You can read the b.s. about secrets. It'll have you scratching your heads. Jobs sounds like a card-carrying member of the MPAA. Hell, did owning Pixar fuck him up this much?

But really, it's all a set-up. Jobs wants the iTunes Store to be DRM free. He's jawboning the industry to come to his position.

Jobs isn't a pawn in Doug Morris' game. He's using his position as the fourth largest music retailer to move the game forward.

Ironically, this is not a story of DRM. It's a story of sale by track. How it's not a reasonable economic solution. God, if only 22 of 1,000 songs on an iPod were purchased at the iTunes Store, what we've got is a sieve. Sure, you might rip your CDs, but how many of those tracks on iPods were paid for?

And it's not like DRM on discs is gonna solve the problem. Hell, just ask Andy Lack, he lost his job trying to lock up the music. That solution is DEAD! Furthermore, there's always the analog workaround.

In other words, Apple's not the problem. The ignorance of the labels is. They're fighting a DRM war that's protecting the provinces, but not the homeland. You've got to replace that CD revenue. Removing DRM won't do it. You've got to go to subscription. Get EVERYBODY to pay. To own unprotected music.

Scared?

Don't be, that's what's ALREADY happening! People want a lot of music, and they want to own it, and they don't want to pay much for it. So, we've got to license at the ISP level, or sell a trading license, and THEN sue all those who don't pay up. Like cops stop speeding (they don't do it by saying you can't drive, or must take the BUS!)

Steve Jobs is on the hot seat. The Europeans are circling the wagons. He's developed a coping strategy. BLAME IT ON THE LABELS!

Makes a lot of sense if you think about it, both his plan and his passing the buck. Why DON'T the labels get rid of the DRM?

Dirty little secret... They're gonna. One of the heads of the four families told me weeks ago that he was OUT, he was all for removing the protection, he wanted this to happen AS SOON AS POSSIBLE!

Unfortunately, this same man still thinks sale by track will win. That people only want all that music because it's free, that they don't play much of what they steal.

That's an incredible misconception. People only steal what they WANT, and they want MUSIC!

Give the people what they want. A ton of music at one low price per month. Maybe make them sign up for a year at first, just like the iTunes Store was Mac only. Experiment.

Sometime in the future, no one will own their music, everybody will rent it, music will be a service.

But not today.

We haven't charged for 8 years. This is not a winning economic strategy. We've got to monetize trading, it's the only way out.

As for Steve Jobs? His play is iPODS, not individual songs. And if he's willing to give up his MONOPOLY, his LOCKED SYSTEM, isn't it time for the labels to move into the future TOO??